What a foolish foolish fellow is Mr Market. He naively believed the hype — that a proposed trillion dollar fiscal stimulus and an Obama bounce, not to mention the dawn of a new year will have a miraculous healing effect on battered stocks. Since bottoming on 20 November, shortly after the US election, the Dow Jones index of shares had increased from 7552 to 9015 — a jump of 19.3% in around six weeks.

Last night, the music stopped, at least temporarily, with the US indices dropping around three percent as the ADP National Employment Report said private sector employment fell by 693,000 in December, “more than had been expected.” While bullish investors pin their hopes on the mooted trillion-dollar bailout package, real world problems aren’t so easy to solve — yesterday, media giant Time Warner announced $US25 billion in write-downs, while aluminum producer, Alcoa, stated that it would eliminate 15,000 jobs as it cuts production. Meanwhile, property prices in the US, UK and Spain continue to slump (Spanish property was down 28% for the year to October).

The recent sharemarket rise follows a similar pattern as seen in the past year. Poor economic data, followed by a chorus demanding some sort of government response lead to a brief rally — as if the elected folk who populate Washington, Canberra or Downing Street have some sort of magic elixir which can resuscitate a slumping economy. They don’t of course. If anything, government action is far more likely to worsen the problem (albeit, in a slower manner).

Whenever a government conducts a “bailout” or “stimulus”, what it is actually doing is a forced re-allocation of wealth from the deserving to the non-deserving. Even worse, when politicians try to come up with solutions to economic problems, they do so with political, rather than economic aims in the forefront of their minds (exemplified by Kevin Rudd’s recent “plasma ‘n pokies” wealth redistribution).

For example, by giving money to car companies or 17-year-old new mothers, the government was re-distributing wealth from hard-working taxpayers to those whose businesses are unsustainable or those whose hormones weren’t kept in check. Alternatively, instead of redistributing taxpayer dollars, the government can simply print money, which punishes those who aren’t lucky enough to own inflation-protected assets, usually the working poor.

As to the benefits of the US stimulus, Bill Bonner, writing in the Daily Reckoning yesterday, shrewdly noted that:

[The incoming United States administration] is planning a “stimulus package” of something on the order of $1 trillion. What’s the package expected to stimulate?

The idea is to get more of these pieces of paper into citizens’ hands, so that they will be encouraged to act as though they were wealthier. It doesn’t seem to bother anyone that the source of the misery of which so many now complain was the fact that, in the past, so many acted so much wealthier than they really were.

Nor does it seem to disturb the collective fantasy that this stimulus plan is being created, more or less, by the same class of people who neither saw anything wrong with the last fantasy nor mentioned to anyone that it was going to collapse.

Mr Market loves a bailout like a heroin addict loves their next hit — a few moments of borrowed pleasure. But propping up an ailing sector with fake money or taxpayer dollars simply serves to duct tape over more serious problems. Throughout the bull market, investors could make money by “buying the dips” — perhaps now, the wise can make money by “selling the bailouts”.

Disclosure: The writer has a short position in the US S&P500 index.